DNOW Inc.

We appreciate you joining us and thank you for your interest in D-NOW. With me today is David Cherichinsky, President and Chief Executive Officer, and Mark Johnson, Senior Vice President and Chief Financial Officer. We operate primarily under the D-NOW brand, which is also our New York Stock Exchange ticker symbol. Please note that some of the statements we make during this call, including responses to your questions, may contain forecasts, projections and estimates, including but not limited to comments about the outlook of the company's business. These are forward-looking statements within the meaning of the U.S. federal securities laws based on limited information as of today, November 7, 2024, which is subject to change. They are subject to risk and uncertainties, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the year, We do not undertake any obligation to publicly update or revise any forward-looking statements for any reason. In addition, this conference call contains time-sensitive information that reflects management's best judgment at the time of the live call. I refer you to the latest Forms 10-K and 10-Q that D-NOW has on file with the U.S. Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information, as well as supplemental financial and operating information, may be found within our earnings release on our website at ir.dnow.com or in our filings with the SEC. In an effort to provide investors with additional information relative to our results, as determined by U.S. GAAP, you'll note that we also disclose various non-GAAP financial measures, including EBITDA excluding other costs, sometimes referred to as EBITDA, net income attributable to D-NOW, Inc., excluding other costs, and diluted earnings per share attributable to D-NOW, Inc., excluding other costs. Each excludes the impact of certain other costs and therefore have not been calculated in accordance with GAAP. Please refer to a reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure and the supplemental information available at the end of our earnings release. As of this morning, the investor relations section of our website contains a presentation covering our results and key takeaways for the third quarter of 2024. A replay of today's call will be available on our website for the next 30 days. We plan to file our 2024 Form 10-Q for the third quarter later today and will also be available on our website. Now, let me turn the call over to Dave.

Thank you, Brad, and good morning, everyone. I want to start off highlighting the strength in our performance in 2024, which has been one of our best EBITDA years, despite being in a smaller market compared to last year, in a period now with ample product availability in the supply chain, intensified pricing pressure, and reduced customer activity for the things driving DNO revenue opportunities. This quarter, we generated significant free cash flow of $72 million. accumulating to $273 million in free cash flow over the trailing four quarters or $281 million in cash from operations during that period. We started the year forecasting 2024 free cash flow at $150 million and raised our full year outlook to approach $200 million in May. Today, we are upgrading that forecast again with 2024 free cash flow to approach $215 million or cash from operations approximately $225 million in 2024. In the quarter, we improved our working capital excluding cash as a percent of annualized 3Q revenue to 15.7%, a recent best approximating working capital velocity at 7x. Looking at the U.S. market, the number of active rigs, completions, and new wells drilled the primary activities that drive our revenues have each declined more than 12% year over year. But we've been able to mute the full impact because of the solutions we offer, fueled by the excitement, passion, and competitive spirit of our people. We attribute this revenue resilience to our position in the market, our importance in the supply chain as viewed by our suppliers and customers, our performance against commitments we make to our customers as compared to our competition, our leadership in growing energy evolution revenue streams, and our team's adjacent market inroads, all helping to mitigate the impact as oil and gas customer spending has declined. Just one notable example of where our organic investments are paying off in the U.S. at our Williston, North Dakota, megacenter, which houses our PVF Plus Projects Execution Center, where we do quoting, sourcing, expediting, staging, delivery, and project fulfillment. It's also home to our fiberglass composite piping systems to support the region with inventory, technical expertise for their fiberglass piping needs. It's the main service, repair, maintenance, and supply stop for FlexFlow for the Rocky Mountain region in our expanding FlexFlow Canadian operations. Our service, our pump distribution business, provides local field service and aftermarket parts out of the Williston Mega Center as well. Their local service techs, coupled with the industry-leading inside support staff, keep our customers' instrument air skids, SWDs, LAC units, and production equipment operational. Finally, EcoVapor uses the Williston Mega Center as its home base, serving the Bakken play for oil and gas, as well as the Northern Rockies-based RNG customers. EcoVapor provides technical support and field service for their units, which are deployed locally for some of our top customers. The wide-ranging Williston Mega Center offers a bright spot and serves as a robust differentiation against our competition. Contributing to our results in the quarter was U.S. Process Solutions, having its best year ever in terms of financial performance. a business we built from scratch in a series of acquisitions starting in 2015. Over the past nine years, we integrated 11 businesses to produce an outstanding pump distribution, rental and service business, combined with engineering, design, and fabrication of highly sought-after process production and measurement equipment, which naturally complements our U.S. Energy Center's business. Process Solutions has been a growth lever for the company over the years, and is an important part of our strategy to expand further into midstream, grow market share from energy evolution activities, and advance into adjacent industrial markets. And now moving to our results. Third quarter 2004 revenue was $606 million, a sequential decrease of $27 million, or 4%, within our guided range. We generated $42 million in EBITDA, or 6.9% of revenue in the quarter, a solid performance. In the U.S., revenue was $482 million, down $30 million or 6% sequentially due to the declining rig completions and project activity. We also had approximately $7 million of 3Q orders that were forecast but not processed as they were delayed. For the past several quarters, more customer consolidations were announced and underway. And for some of our customers, Those pending deals continue to impact project timing, resulting in funding and approval delays or project timeline shifts. I'd like to mention a few project wins that speak to the execution of our strategy. First, we expanded revenue in the Gulf Coast at an LNG facility as we worked to further diversify revenue in the midstream and downstream markets. In chemical processing, we provided a large number of valves to an EPC for the construction of our large-scale chemical plant expansion, an example of growing revenue into downstream chemicals processing tied to the reshoring trend of manufacturing. And we grew revenue through the award of a large gas pipeline project for a gas utility customer. Each speaks to winning business through non-upstream markets that we are targeting to diversify our focus. In U.S. process solutions, revenue was lower in the quarter due to software project and completions activity. And, as mentioned in my opening remarks, we improved performance sequentially as our teams worked to optimize expenses and product costs. On the fabrication side, we vertically integrated a UL-certified panel shop and the packaging of our I&E scope of work on our fabricated products to improve margins in our power service business. Our engineering and product development team updated and shipped our new LAC unit design, incorporating an optimized footprint with a new pipeline pump. For the customer, the new design improves the reliability of the pipeline pump, provides a smaller footprint with shorter lead times, and at a more competitive price. We are continuing to grow our mechanical seals business in Montana, Wyoming, and Colorado, which helps improve margins and offers less cyclical revenues when compared to drilling and completions-related revenue. At a refinery in the U.S., we helped an operator reduce emissions and eliminate leaks by upgrading their current pump sealing systems by adding and incorporating secondary containment systems. This is a great example of how we're helping our customers reduce Scope 1 emissions in a downstream refinery. During the quarter, we expanded our pump distribution products and service geographies by growing our territory with a top-tier manufacturer who offers a broad range of pumping solutions to the US mining industry. Second, we added an additional new line of pumps targeting chemicals and slurries activity. And finally, we added a more robust API pump line for the process-related chemicals and refining end markets that will help us expand our downstream revenues. In the mining sector, we had a number of wins. For example, we supplied vertical turbine pump products to a potash customer used in solar evaporation production mining. In the expanding uranium sector, to meet the growing demand for commercial nuclear power generation, we provided pump packages as older mines are being brought into production. In our FlexFlow business, we grew our Canadian market presence by securing a master service agreement with an oil and gas operator. In the refining sector, we have expanded the number of FlexFlow units in service as we execute on our strategy to seek revenue diversification for our HPOMP mobile rental units. In Canada, revenue was $65 million for the quarter, an increase of 16% sequentially, primarily due to the recovery in activity from the breakup period Last quarter, we saw activity increase with several of our top customers and invested in sales efforts to help target the growing opportunities in RNG, hydrogen, and CCUS in Canada. Beginning in the third quarter and continuing into the fourth, we are providing steel and alloy pipe to an industrial gas operator for a hydrogen project in eastern Canada. For international, revenue was 59 million, a decrease of 6 million or 9% from the second quarter, primarily due to location closures and lower project activity in the Middle East and UK. We renewed several customer frame agreements for our McLean electrical distribution business in the UK. In Australia, we saw an increase in project activity as we provided cable packages and electrical bulks to an IOC, for an interconnect and tie-in project at the Gorgon LNG facility. And finally, our export group continues to provide a range of products to support a number of oil and gas operators in West Africa. And now a few comments related to energy evolution. In terms of potential demand for DENAL products within the CCUS space, in 2024, the number of CCUS projects has increased 60% to 628 facilities from 392 facilities last year. 44 projects are in the construction phase this year, an increase of nearly 70% year over year. And during the quarter, we had a few notable energy evolution wins. In the direct air capture space, we provided PVF plus products during the construction phase of a project in Texas. We sold PVF products in gas compression stations to a low carbon power plant in the US. We provided PBF products to expand the capacity of a sin fuels plant to capture more CO2 from coal conversion through a pipeline. Operating companies used the CO2 for enhanced oil recovery operations for permanent CO2 geologic sequestration. Finally, we delivered PBF and MRO products to a mining operator who is extracting lithium from a geothermal brine solution. Moving to our digital now initiatives, our digital revenue as a percent of total SAP revenue improved to 52% during the quarter, passing the 50% mark for the first time. We have been working with a number of customers to connect our respective systems to drive efficiencies and lower the cost of transactions as we work with customers, suppliers, and partners to extract value from our technology platforms. We began processing orders through a new B2B digital integrated procurement solution from a top 20 customer using our e-commerce punch-out process and digital ordering workflow. This process is a highly efficient method of procurement, enabling the customer to seamlessly order D-NOW products through the ERP procurement and requisitioning system. Ultimately, the integration benefit lowers cost per transaction for both parties and ensures when purchasing products from D-NOW, the cost to transact compared to non-integrated suppliers is lower and an advantage for Dena. In an example of gaining efficiencies, leveraging technology with a supply chain solutions customer, we implemented a customer inventory surplus automation solution for a key customer using automation to streamline and reduce the required systematic processing, resulting in a labor savings of approximately 800 hours per year. and switching to acquisitions with a solid balance sheet, no debt, and a strong cash position. Inorganic growth is our biggest lever right now and remains a key part of our growth strategy. Historically, we believe acquisitions are the most ripe for us in a market like this. Our strategy prioritizes margin-accreted businesses, aiming to strengthen and diversify our capabilities in serving our customers. We maintain rigorous standards, investing in opportunities where we are the natural operator poised to create value, increase the contributions of acquired companies, and drive long-term shareholder value. We are confident we can get more of these to the finish line in the near term. With that, let me hand it over to Mark.

Thank you, Dave, and good morning, everyone. Total third quarter 2024 revenue was $606 million, up 3% or $18 million year over year. EBITDA, excluding other costs, or EBITDA, for the third quarter was $42 million, or 6.9% of revenue. And year-to-date, we've produced $131 million, or 7.3% of revenue, our second-best EBITDA level since going public. U.S. revenue for the third quarter, 2024, totaled $482 million, an increase of 34 million, or 8% year-over-year. U.S. energy centers contributed approximately three-fourths of total U.S. revenue in the third quarter, and U.S. process solutions contributed the remainder. In Canada, for the third quarter, 2024, revenue totaled $65 million, down 3 million or 4% year-over-year. And when comparing to the second quarter of 2024, Canada revenue increased $9 million or 16%. International revenue for the third quarter of 2024 was $59 million, down $6 million, or 9% sequentially, partly impacted by some restructuring of our international operations to align with where our customers see the most value. In the quarter, we identified and took action on a handful of locations that had suboptimal financial returns and outlook. Year-to-date revenue across the closed locations accounted for approximately $10 million. of the $186 million in international revenue through the third quarter of 2024, or roughly 5%, with minimal profit contribution. During this recalibration, we continue to focus and invest in areas where our strengths lie, specifically in the regions of UK, Norway, Netherlands, Australia, the Middle East, and export. Now, moving back to the income statements, Gross margins increased 50 basis points from the second quarter of 2024 to 22.3%, as inventory step-up charges in the first half of 2024 did not repeat. Warehousing, selling, and administrative, or WSA for the quarter, was $107 million, up $2 million from the second quarter as expected, primarily related to favorable WSA impacts in the second quarter. We forecast the fourth quarter WSA level could lower towards $103 million as we focus on operational efficiencies and resource alignment to regional market activity. In the third quarter, we reported $8 million of depreciation and amortization expense. And for the fourth quarter, we forecast depreciation and amortization to be approximately $9 million. Now moving to operating profit, in the third quarter, total company operating profit was $23 million. The U.S. generated $25 million, and Canada delivered $3 million of the operating profit in the third quarter of 2024. The international segment recorded a $5 million operating loss in the third quarter of 2024, driven by $8 million of charges related to the restructuring, and those items are excluded for non-GAAP reporting. With the largest component being a non-cash $5 million charge from the customary reclassification of foreign currency translation losses, which is a component of our accumulated other comprehensive income and loss, to the P&L in the quarter. This non-cash charge is presented within the impairment and other charges line of our income statement. Our interest income in the period was $1 million. And moving to income taxes, in the third quarter of 2024, D-NOW's income tax expense was $9 million and $25 million year-to-date. Our effective tax rate, as computed on the face of the income statement, was 29.8% year-to-date 2024. Our third quarter tax rate was higher than the U.S. federal statutory rate, primarily due to non-cash restructuring charges in our international segment with no associated tax benefit. We estimate our 2024 full-year effective tax rate to be approximately 28% to 30%, as reported for GAAP. or approximately 27% to 28%, excluding the impact of those restructuring charges. Net income attributable to D-NOW, Inc. for the third quarter was $13 million, or 12 cents, per fully diluted share. And on a non-GAAP basis, Q3 2024 net income attributable to D-NOW, Inc., excluding other costs, was strong at $22 million, or 21 cents, per fully diluted share. Moving to the balance sheet, At the end of the quarter, we had a cash position of $261 million and zero debt. Cash increased by $64 million in the third quarter, driven by our cash generation from operating activities, partially offset by $7 million of stock repurchases in the quarter and $2 million in capital expenditures. We ended the third quarter with total liquidity of $622 million, comprising our net cash position of $261 million and $361 million in additional credit facility availability. Our existing $500 million revolving credit facility extends into December 2026, providing D-NOW with immediate access to capital under the facility. Ending accounts receivable is $405 million in days sales outstanding, or DSO, with 61 days at the end of the third quarter. Inventory was $364 million at the end of the third quarter, a decrease of $35 million from the second quarter. Our operating model, incredible talent in the field, partnered with our inventory planning teams have done an outstanding job to ensure the right products on hand that the market demands are located in proximity to our customers, all while managing the perishable risk that comes with inventories. The results of this orchestration can be measured in an impressive and improved inventory velocity of 5.2 turns in the quarter, beating our prior quarter's high mark. Accounts payable was $278 million at the end of the third quarter, flat from the second quarter. And for the third quarter of 2024, working capital excluding cash as a percentage of annualized third quarter revenue was 15.7%. In the third quarter, cash provided by operating activities was $74 million and $280 million for the trailing four quarters, ending September 30, 2024. We invested $2 million in capital expenditures in the third quarter, bringing our third quarter free cash flow to $72 million. And for the trailing 12 months, free cash flow is totaled $273 million. We continue to execute on our share repurchase program that is authorized through December 31, 2024. And as of September 30, our cumulative repurchases under our $80 million authorized share repurchase program totaled $74 million. Our commitment to growing the company through a combination of organic initiatives and margin accretive M&A remains a key priority, while also having the ability to repurchase shares opportunistically as we use the tools in our capital allocation framework to generate attractive shareholder returns without deviating from our disciplined approach to balance sheet management. We continue to be debt free to keep cash flow generation a top priority. And with that, let me turn the call back to Dave. Thank you, Mark.